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Contract should always pay significantly more than direct hire, since there is less security and benefits.

It simply shouldn’t be possible to enter a contract for less than direct hire wages and benefits, in cases where the contract is obviously a way of circumventing employment. Laws should be written such that circumventing the spirit of the law is also circumventing the letter.

As far as I know, that's exactly what the law in many (most?) places says. In the US, multiple states - most recently California, after a case regarding delivery drivers - apply the ABC Test[1], and the IRS has its own classification as well.

I mean, it's not that the contractor can't get paid less, it's that they can't be contractors at all, even if the employer claims so.

[1] https://www.law.cornell.edu/wex/abc_test

According to the ABC Test, my entire visual effects career (15 years) was illegal.

this is... well, yeah, a surface reading of the test is clearly not how it legally plays out, 'cause from a surface reading, almost all "contract" jobs are not.

I think this is legally dealt with where I am by ensuring that everyone is an actual employee of someone... if you are a "contractor" you are actually an employee of the body shop. You get paid on a w2, and thus aren't legally a "contractor"

From what i see, the body shops charge the employer 30-50% more than what they pay the employee (the range depends entirely on how good the employee is at negotiating, and tends to start closer to 50%, and move towards 30% as said employee is in the same position for a while)

A contract can include security, where at-will W2 employment never does.

But working as a contractor demands a substantial premium anyway, because the contractor is responsible for self-employment tax.

There is a huge difference between e.g the US where workers have little security and places where they do. Especially when you consider the gig economy. Consider how Uber works in an environment where a laid off worker might be paid 6-12 months in full depending on employment lengh. Uber does operate in such places but it’s basically in a perpetual fight against unions and authorities.

Where are you seeing this? Here in London I still get way more as a contractor then I would be full-time, like 50% more.

You should be getting 2x to 3x more

There is no "should". Most contract jobs are low risk - they might last for years and if you get fired, you can easily find a new one. Unless there is a major economic downturn, in which case even permanent employees will be downsized.

That's easily worth a 50% salary bump. It also often comes with tax advantages.

In the US 2x or (100%) is the equivalent to a direct hire salary. Since the employer taxes, social contributions, and paperwork filing is directly managed by the contractor now. You’ll have to be your own HR or hire someone to do it for you.

That's not really true:

-- you can tax deduct a lot of things, of course, which include day-to-day travel, equipment (phone, internet, laptop), and much more. A part of rent. Let's not even talk about the SEP IRA you can use to further put away money for yourself and lower your tax burden. Unlike an employee 401k, you can decide to put a large chunk of your salary in an IRA at any time, including up until Apr 15 of the following tax year.

-- I'm about to find out, but the lower corporate tax may be a boon here

-- You work 40 hours, or whatever hours. Employees work INFINITE hours. Weekend work, on-call anyone?

I'm not sure what you mean by own HR. For healthcare, you can use the state marketplace or you can look into things like Freelancers Union. For paying tax, you have an accountant. For naughty behavior to report to HR, you have only yourself...

3x is the norm for short term it contracts in the UK - ok if its a year you could go lower.

It depends on the market! If people pay 2-3X more, then yes. If you need to be a published author in tech or have previous experience as an MD in an investment bank, then it's a marginal niche market.

I think the difference is high value, in demand skills vs temp office work. Indeed we’ve always had this dichotomy with temp agencies paying peanuts to just about anyone to do menial office tasks. But if you have skills where the supply is low, it would not make sense to stick around one of these $10/hr jobs...

I doubt the same company would offer less for a contract on the same position.

I can see why it is balancing out in general though. More investor money going into companies that prefer to hire full time staff rather than contractors would push up rates for permanent staff.

This is fascinating. What do you think possible causes for that might be? Is this an America/Bay Area thing or do you suspect it to be more widespread? Would be interested in other people's take on this also.

So my impression is largely a bay area/silicon valley impression, every time I try to work elsewhere, people start asking for degrees, which I don't have, and they also mention that they pay dramatically less. Or, at least, that is my experience, with the jobs I have been offered.

My perception is that salaries for direct-hire software engineers at top-tier companies have gone way up in the last ten years or so. My impression is that contractor wages are... keeping up with inflation.

Also note, my perception is that contractor interviews have not gotten much more difficult at all, while direct hire interviews have practically become contests of endurance; like you are expected to spend like 5x as much time on a direct hire interview than, say, 10 or 15 years ago, while you can do a contract interview over a long lunch.

Companies also seem to be okay paying Engineers very significant sales-style performance bonuses (in fact, this is where almost all of that increase in pay has come from) and this really helps them keep the gamblers; the people like me who jump every few years 'cause someone offered 20% more. (I mean, the bonus system is another system you need to learn to game, but it's not harder than the interview system.)

My speculation (and I'm totally unqualified to speculate on sociological trends, but you asked.) is that something has changed, and the cultural prestige of the Engineer has gone way up, and that this has changed management's willingness to spend directly on Engineer compensation.

My last contract job, I was hired sight unseen, with only a cursory technical interview, that mostly established I could breathe.

That was my experience as well. Needless to say, I was woefully unprepared for the job, but that also meant I have learnt a ton of interesting things.

A contractor can be let go on a moment's notice, so there is much less risk of a bad hire than a direct. So no need to expend the effort on an interview.

What do you do where a degree is critical? I've never even been asked about my education in over 20 years.

>What do you do where a degree is critical? I've never even been asked about my education in over 20 years.

I am a "linux systems administrator and programmer"

in silicon valley, me too. I mean, I'm sure that my lack of a degree gets my resume binned some places, but almost nobody mentions it, and there are plenty of jobs where they clearly don't care; I don't have trouble finding work.

My experience is that if I try to get a job outside of silicon valley (and especially if I try to get a job outside the USA) my lack of credentials becomes a big issue.

Part of this is cultural, I think, though a lot of it has to do with work visas. As a US citizen, I can vacation most places without too much trouble, but I still need to jump through hoops if I want to work elsewhere, and if I want to get a 'skilled worker' visa, they usually expect a degree.

Thanks for the insight. I've experienced British, Australian and New Zealand contract markets and contracting is far and away the only way to get even close to Bay Area salary levels so I'll be watching this trend closely. I really appreciate you commenting; thank you.

If it's mostly America/Bay Area I would propose the following explanation:

Conventional employers/clients (e.g. your friendly diesel manufacturer) spend money on developers when they have a problem they want solved, they love expensive freelancers: if they could they would fly in a squad of experts, get a solution for a single lump sum payment and then hand it over for maintenance to that underpaid slob they keep in the basement.

Overfunded startups as well absurdly profitable SV success stories are a very different story. Building a talent pool is a core investment for them. In many cases they would rather have one good hire than two good ones and two bad because their immediate needs are already met and low performing hires are avoided not so much because of another head on the payroll, but because talent dilution is impossible to undo. They are not interested in adding quantity, but building quality teams is just the way they spend their money. Offers will be either high or nonexistent, and freelancers not welcome.

Exactly this... to your first point, second tier cities in terms of software development jobs (Phoenix, Austin, Atlanta, etc) have a lot to offer. There's enough contract work that you can always find something within a couple weeks, and pay is generally competitive to salaried positions. There's also quite a bit of FT work, but more of that will be with more stable tech.

YMMV, but the quality of life, at least for me in Phoenix feels significantly better. I may not be making a quarter million or more a year as I might in SV, but I also don't have nearly the level of stress in my life.

An interesting point - I hadn't at all considered the trend of slowly growing an engineering team. I'd bet you're on the money with this.

The benefits package a direct employee is typically worth 40% of the salary. Hence, a contractor without benefits or employment stability gets paid more to compensate.

> The benefits package a direct employee is typically worth 40% of the salary. Hence, a contractor without benefits or employment stability gets paid more to compensate.

I... think you may be mistaken.

I've heard that big companies have a total overhead of 40% for a worker, and that might be true once you factor in the cost of middle management and office space, though again it would vary a lot by pay (I imagine office space costs a large portion of a less well paid salary. Around here, quarter-million dollar a year SWEs get the same tiny desks you'd expect of someone making 1/4 that.)

but I've got a reasonable idea of what benefits cost, and it's nowhere near 40%, at least for a SWE in my jurisdiction, where total comp is so high and the benefits are... comparatively minimal.

don't forget about equipment and payroll tax

It’s 7.65% for first $128k for federal, maybe a couple extra % for state level taxes.

As a contractor you don't get paid holiday (incl bank holiday) or sick days. That by itself can account for 20% of pay, not counting other benefits.

Most salaried people have 7 to 9 holidays per year, and if you’re lucky and highly paid, maybe another 4 weeks paid time off. 6 weeks of paid time off divided by 52 weeks is just 11.5%, and that probably puts you in top 10% of the population in terms of paid time off.

Only in the USA - I had 30 days when I joined part of Relex in the UK

But contractors do get paid overtime.

ha ha ha ha ha! Long ago companies figured out to pay by the "work unit", and unless you are working 50% to 100% more then your paid time you are under performing and at risk of being fired.

True, but on the flip side the contractor gets paid per hour (unless they're daily), whereas the salaried employee has no idea how many hours he/she will work. It's not said in interviews (although "this is not a 9 to 5 shop" is common here in NYC). It's also not written in the employment contract. It's a wildcard, and gets worse due to instability in the environment or team competitive culture or crazy upper management or a million other things.

"this is not a 9 to 5 shop" - this just gave me flashbacks.

The benefits are:

1. health insurance

2. stock options

3. so-called "employer's contribution" to social security

4. 401k employer match contributions

5. sick leave

6. vacation

7. maternity/paternity leave

8. stock purchase plan

9. unemployment insurance taxes

10. 2 weeks severance pay

11. holiday pay

12. various legal rights contractors don't have

13. employer provided equipment that a contractor would be expected to provide

Here's the first hit on google:

https://www.bankrate.com/finance/financial-literacy/the-valu...

If we restrict this to people working in high demand engineer/software related fields, then I would say

#1,3,4,5,6,7,9,11 add up to at most 30%

And #2,#8,#12,#13 could be worth 10%. I don’t think #10 is a guaranteed benefit, and usually is in exchange for forgoing any other grievances you might have against employer.

But that would be restricting it to highly paid, in demand professions. For other people (upwards of 80% of the US), many of the items on that list don’t apply to them, so I don’t see how it would cost 40% more for an employee versus contractor.

Also factor in that some of these benefits are paid for with before-tax money, while if you paid them yourself they would be with after-tax money. This is not a trivial consideration.

As far as I know, the only tax benefit would be for health insurance, but if you are a sole proprietorship (which you should be), then you can purchase health insurance pre tax also.

401K contributions are also pre-tax.

With your own business you can contribute 2x the best employee 401k deal and it is also tax free.

https://www.mysolo401k.net/solo-401k/solo-401k-contribution-...

If you pay them as a sole proprietorship or llc, you also get to claim the tax benefits.

A sole proprietorship is almost as easy to file as a 1099, and a good choice when a liability veil would be easily be peirced (as you're representing your own skills)

It’s definitely not 40% in finance. The only people that might be getting that big of a proportion in benefits are government employees with taxpayer funded defined benefit pensions.

FICA is 7.65% up to $128k, then 1.45% after that. Health insurance is at most $500 per month (on average). That’s $6k/year, so somewhere around 3% to 12% of wages. Paid time off might be 2 to 4 weeks, so maybe 8% (4 weeks/52 weeks).

I don’t know how to value job security, possible severance, or being able to move up in a company, but it would have to be at least 20% to bump it all up to 40%. US has at will employment, so I don’t think I’d value that too much. Maybe you’re less disposable as an employee than contractor, but does it really matter if you don’t have union contracts stipulating certain processes?

However, I’d still charge at least double the hourly rate of an employed person to be a contractor since you need to cover the risk of not finding future work, but obviously that depends on what your competitors are willing to work for.

40% is about right for jobs in higher ed where the large majority of employees make less than six figures and some benefits, like health insurance, are not not proportional to salary. Regarding health insurance, $6K/year is only a reasonable estimate of the employer's outlay for an individual, family plan will be at least three times that.

Yes, benefit for family plans are probably worth $12k+ per year, but that’s if your employer offers it.

https://www.bls.gov/opub/ted/2018/mobile/employee-and-employ...

I suspect that there are 3 classes of people when talking about employee benefit costs (in a employee vs contractor discussion):

1) Private sector, high pay professional - I would agree benefits could be around 40%, but this also only applies to maybe top 20% of non government employee population.

2) Government employees, maybe even more than 40% considering their post employment benefits.

3) The bottom 80% of non government employees, who I doubt approach anywhere close to a benefit value equal to 40% of their pay.

According to this site, average health insurance cost for family coverage is almost $20K/y - http://www.ncsl.org/research/health/health-insurance-premium... So it really depends on whether your employees are all single. Also I think you're not counting other things that are normally counted in overheard: cost for space, recruiting, etc: http://web.mit.edu/e-club/hadzima/how-much-does-an-employee-...

I was assuming that in this scenario, the employer is deciding whether to add an employee versus a contractor, and they already have other employees, then those other overhead costs are there anyway.

I have seen the same change between the 90s and now.